Brief analysis referring updates of revised CAS-14


Date:  2017-08-31    Autor:   WANG, Christian

Ministry of Finance issued on 5th July, 2017the revised “Accounting Standards for Business Enterprises No.14 – Revenues” (New CAS-14), in order to keep the convergence with “International Financial Reporting Standards or the Accounting Standards for Business Enterprises No.15– Customer contract revenue” (IFRS 15).

What are the changes in new CAS-14?

1.    
Scope of application


Previous

Scope

New

Scope

Remark

CAS-14

the sale of goods,

rendering of services,
 transfer of asset-use -rights

New CAS-14

all revenues except those arising from  long-term investments, financial instruments, leases and insurance contracts

New CAS-14 includes previous CAS-14&15

CAS-15

construction contracts

2.     Recognition of revenue

Previous

Method

Application

CAS-1415

transfer of risks and rewards

sales of goods

CAS-15

percentage of completion

service and construction contracts


New

Method

Application

New CAS-14

5 steps” model

Revenue should be recognized at certain  time point (or within a certain period), where customer has acquired control  over the goods or services based on the amount of consideration that the  enterprise is entitled to collect.

3.     Referring sales with quality guarantee clause (QGC)


QGC

Previous

Recognition

New

Recognition

Single Service

CAS-14, 15

Not mentioned

CAS-14

As single performance obligation

Non-single Service

CAS-14, 15

Not mentioned

CAS-14

According to CAS-13


Policy explanation

1.     How magnificent will new CAS-14 impactenterprises?

According to new CAS-14, contracts should be split into single performance obligations, whose revenue should be recognized at a certain time point or within a certain period. Compared with current accounting treatment, for contracts composed by several portions, progress of revenue recognition will be accelerated or postponed. The enterprises which applied POC method should reevaluate whether the revenue should be recognized within acertain period or at a certain time point. And the enterprise which applied method of transfer of risks and rewards used to recognize at a certain time point. It may have to recognize revenue within a certain period in the future.

Enterprise may have to reconsider process of sales and signing contracts. Some enterprises may have to reconsider current contract clauses and commercial practice in order to reach or maintain current revenue level.

Enterprise may have to modify accounting procedure and internal control, in order to get new information from sales, marketing and business development departments etc. , and need to record especially the information concerning estimation and judgment.

2.     When will new CAS-14 be implemented?

Enterprises listed both domestically and abroad and those listed abroad and adopting the International Financial Reporting Standards or the Accounting Standards for Business Enterprises to prepare financial statements shall implement the Standards from January 1, 2018; other domestically listed enterprises shall implement the Standards from January 1, 2020; non-listed enterprises subject to the Accounting Standards for Business Enterprises shall implement the Standards from January 1, 2021. Meanwhile, enterprises are allowed to implement the Standards in advance.

Briefly speaking, all enterprises have to implement new CAS-14 at the latest 1st January, 2021. Unlisted enterprises still have more than 3 years to understand, study and take a smooth transiti onto new CAS-14.

In this process, if you need professional consulting service or suggestions, please contact our professional team!

Tips


Modelof “5-steps-method”

Step1 Evaluating contract

When the contract between an enterprise andits customer meets all of the following conditions, the enterprise shall recognize revenue when the customer acquires the control over the relevant goods:

1) the parties to the contract have approvedthe contract and undertake to fulfill their respective obligations thereunder;

2) the contract defines the rights and obligations of the parties to the contract relating to the goods transferred orthe services rendered (hereinafter referred to as the "transferred goods");

3) the contract has clear payment terms relating to the transferred goods;

4) the contract is of commercial substance,namely, the fulfillment of the contract will change the risk in, or time distribution or amount of future cash flows of the enterprise;

5) it is probably to recover the consideration that the enterprise is entitled to due to its transfer of goods to the customer.

Step 1 clarified the definition of commercial substance and preconditions for contract evaluation.

Step 2 Evaluating performance obligations
On the commencement date of the contract, an enterprise shall evaluate the contract, identify each single performance obligation therein, and determine that each single performance obligation is fulfilled within a certain period of time or at a certain time point.

Where any of the following conditions ismet, a performance obligation is deemed to be fulfilled within a certain periodof time; otherwise, it is deemed to be fulfilled at a certain time point:

1. when the enterprise performs a contract,the customer obtains and consumes the economic interests from such performance.

2. the customer is able to control the goods under construction during the enterprise's performance of a contract.

3. the goods produced during the enterprise's performance of a contract are of irreplaceable purpose, and the enterprise has the right to charge for the part of the contract that has been performed to date during the whole contract period.

Main task of Step 2 is tosplit contract into single performance obligations and determine that eachperformance obligation is to be performed within a certain period or at acertain timepoint, which will decide the method to be used in Step 5.

Step3 Determining transaction price

Transaction price refers to the amount of consideration that the enterprise is entitled to collect due to its transfer of goods to the customer. The amount collected by the enterprise on behalf of a third party and the amount expected to be returned by the enterprise to the customer shall be treated as liabilities for accounting purposes and shall not be included in the transaction price

An enterprise shall measure revenue according to the transaction price attributed to each single performance obligation.

Step4 Allocating transaction price

Where a contract includes two or more performance obligations, the enterprise shall apportion the transaction price among all single performance obligations according to the relative proportion of the individual selling price of goods promised in each single performance obligation. The enterprise shall not re-apportion the transaction price due to any change in the individual price after the date of commencement of the contract.

Step5 recognizing revenue

According to the evaluation of performance obligation in Step 2 (within a period / at time point), revenue should be recognized according to two different methods as follow:

Method 1

For a performance obligation fulfilled within a certain period of time, the enterprise shall recognize revenue according to the performance schedule within such period of time, except where the performance schedule cannot be reasonably determined. The enterprise shall consider the nature of the goods and adopt the output or input method to determine the proper performance schedule. Specifically, the performance schedule is determined according to the value of the goods transferred to the customer for the customer under the output method, and according to the input made by the enterprise for fulfillment of the performance obligation under the input method. For similar performance obligations under similar circumstances,the enterprise shall adopt the same method to determine the performance schedule.

Method 2

For a performance obligation fulfilled at acertain time point, an enterprise shall recognize revenue at the time point when the customer acquires control over the relevant goods. When judging whether the customer has acquired control over the goods, the enterprise shall consider the following indications:

1. the enterprise is entitled to charge for the goods at present; that is, the customer is obliged to pay for the goods at present.

2. the enterprise has transferred the legal ownership of the goods to the customer; that is, the customer has obtained legal ownership of the goods.

3. the enterprise has transferred the goods to the customer in kind; that is, the customer has obtained ownership of the goods in kind.

4. the enterprise has transferred the major risks and rewards in the ownership of the goods to the customer; that is, the customer has obtained the major risks and rewards in the ownership of the goods.

5. the customer has accepted the goods.

6. other indications showing that the customer has acquired control over the goods.


If you need further information or support: Please do not hesitate to get in touch with us via: marketing@ecovis.cn








If you have further interest in of the complete (8 newsletter issue, you can download the whole newsletter bulletin via the “PDF icon” at the right hand top/ bottom side(PDF